Mercedes has committed to working with Build Your Dreams (BYD) to develop electric vehicles specifically for the Chinese market.
BYD is developing a burgeoning reputation for electric vehicle technologies - it started as a battery manufacturer before making cars - and Mercedes is said to be keen to harness its local knowlede in China.
As part of the deal between Mercedes parent Daimler and BYD, the two firms will create a new brand to sell a vehicle designed for the Chinese market.
"Daimler's know-how in electric vehicle architecture and BYD's excellence in battery technology and e-drive systems are a perfect match," said Mercedes chief Dr Dieter Zetsche.
"We are very excited about this opportunity to work together with Daimler, the inventor of the automobile," said BYD chairman Wang Chuanfu.
Daimler and BYD have also agreed to develop a technology centre in China as part of the agreement - but no dates have been issued for the facility's completion, or the launch of the new brand.
BYD's share price rose by five per cent after the tie-up was announced.